The focus is turning to Germany

The focus is turning to Germany, especially now the ZEW business sentiment indix has turned a corner. It surged 15.7 points to +26 in Feb, far more than expected and the highest since July 2024. Trading Economics notes “It also marked the largest increase in investor confidence since January 2023, ahead of the federal election, as optimism grew that the new German government would be capable of action. Private consumption is expected to gain momentum over the next six months following a period of sluggish demand, while the European Central Bank’s recent interest rate cut and signals of further monetary easing have improved the outlook for the construction sector.”

This is a big deal. It’s the first favorable data we have seen from Germany in almost two years. Meanwhile, the Trump presidency is smearing mud all over the US name. Some part of the dollar’s pullback may well be due to general revulsion.

Forecast

The dollar retreat is getting dug in, down even against the peso and some other surprising cases. We continue to question the move lower against the CAD, which has stalled, but again, logic does not always prevail when it comes to market sentiment.

The German election next weekend is likely going to become the strongest factor as the week progresses. The core issue is getting rid of (or around) the deficit fixing mechanism, something Keynesians frown upon, that is one of the leading promises of the far right along with ugly anti-immigration and anti-white notions.

Mr. Draghi’s treatise on how to fix the European economy included the need for additional capital investment and a lot of it, and this would deliver at least some of it. While everyone bemoans the social and political aspects of the far right taking the reins, the financial sector consoles itself with the idea that Germany may stop being the proverbial sick man of Europe This bodes well for the euro (and the DAX). 

As noted above, some analysts say the dollar pullback is ending, but we doubt it. The highest high on Friday was 1.0514, not a real test of the highest high before that, 1.0521 on Jan 24. In order for a retreat to gain momentum, the highest high has to be tested more strongly and more decisively defeated. We expect to see the 32% Fib level tested (1.0573) after a more muscular break of the B band top (1.0518), not to mention the ATR top at 1.0557.

We lack any news or data to justify a dollar recovery. To be fair, the market doesn’t always need something specific and dramatic to perform a switch.

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